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PostHeaderIcon Tax Planning for 2013 – The Payroll Tax Cut

Enacted in 2011, employees and self-employed people alike received a temporary 2% cut in their payroll taxes.  Mired in Congress, the extension of this tax cut was given some odd treatment because the two sides of the aisle couldn’t agree on how to pay for it so for a while, there was just a two month extension.  At the end of February, a full year extension was finally passed but as we get closer to the end of the year, it’s unclear what the fate of this tax cut is going to be.

If you’re an employee (of a company you don’t own), there’s not a lot you can do to plan.  Either the cut will be extended and you’ll get or it won’t and you’ll see your pay check take a hair cut.  For the self-employed who pay SE tax, you fate is about the same.  If you’re an employee of your S-Corporation, there is a little bit you can do.  In December, if the political winds are telling you that an extension isn’t going to pass, it might be a good time to push some salary (maybe a one time bonus or an advance) from 2013 into 2012.  Other than that, this one is a big “wait and see.”

PostHeaderIcon Tax Planning for 2013 – The Tax Rate on Dividends

Last week we talked about capital gains and this week, we’re going to talk dividends.  This year, most dividends will be taxed at the capital gains rate which maxes out at 15%.  If nothing is done, that special rate goes away and dividends will be taxed at your marginal tax rate which could go as high as 39.6%.  If you thought the 5% increase on capital gains is big, managing your dividends if you’re able to is an even bigger deal.

For a lot of people with stock investments, there is no control over the dividends.  You can opt to move to stocks that pay no dividends and you might see some of that.  Where this rate change will really see an effect is if a person owns a C-Corporation or has an S-Corporation that has some C-Corporation earnings and profits.  If you do and you have some cash sitting around, you might want to look at pulling it out as dividend.  I wouldn’t do it until after the election although you can get an idea on what the political climate is going to be like, but until then, you have some time to assess the situation.

PostHeaderIcon Tax Planning for 2013 – The Long Term Capital Gains Rate

The year 2012 and leading into the year 2013 could be potentially the most challenging year I’ve known to do tax planning.  We have several provisions expiring, we have an election year and we have a fractured Congress.  Word on the street is that very little in the tax arena will be addressed until after the election so we’re looking at November and December to get changes or renewals done before the end of the year.   Based on the current tempo of government, I’d bet we’re hung out to dry but I’ll be looking at some of the rules and how they’ll change if nothing is done.

First we will be looking at the long term capital gain rate.  Right now, the tax rate on long term capital gains is 15% and it’s zero if you fall into the ten or fifteen percent  tax bracket.  If there is no action and the current provision expires, the long term capital gains rate will go up to 20% and it will be 10% if you’re in the fifteen percent tax bracket (the ten percent bracket will also go away).

What does this mean?  You really want to look at your capital gains transactions at the end of the year.  You might want to accelerate the gain on a stock you own to get the better rate and you also might want to defer any losses until 2013 since they’ll be more valuable.  If you’re out of basis in your S-Corporation stock and you want to pull some money out and take the tax hit, you might want to do it sooner rather then later to get the better rate as well.  You also might want to put off a like kind exchange and pay the tax on a transaction knowing this might be as low of a tax rate as you’re going to get.

As always, talk to a tax professional but if you’re sitting on some gains, you want to be extra careful and do a little bit more planning this year than in any other year I can think of.